OCA - Oceania Group - retirement villages

[Maverick]

Well that has to be one of the most complicated reports I think I've ever seen. Where do we even start?

To pick just one (of dozens) as not to send everyone to sleep, Beagles post about rampant care costs constantly stripping away any of the ultra slow gains of DMFs etc. You raise very valid concerns, and always have, about this ever growing disappointment.

To be fair, , the analyst pointing out that operation costs have gone up 9% , although true , needs a bit of unpacking . In those costs they had an extra one off cost of $1m for covid cost and they also repaid $1.8m of wage subsidy also they took over the staff cost at Frankton- a big paddock with a single level 44 bed rest home on it.
If We set aside these extra cost out and consider the extra new staff additions then the staff cost have actually risen this HY at the usual OCA annual pace of about 6.25% p/a over the last 5 years ( the govt DHB fees have gone up about 5.5% p/a in comparison over the same time) .

The ratio of operations expense /care fees tells a grim picture as you, again, rightly point out Beagle
These are annual ratio results;
2017-83%...2018-87%..2019-.90%...2020-97%...2021-97%...2022-(inc estimated 2hy) 97%.

So this year and the last 2 years operations expense /care fees have leapt up a lot and then flatlined at 97% which is pretty well only break even. This is either DHB underfunding as you suggest or extra covid costs (or some combo most likely). Given the time period and flatness of the 2 prior years (plus this year) I'm tilting towards covid being the biggest reason. I pity the poor mum and dad owned rest homes who will be really struggling without fandangled ORAs and PAC fees to help. One thing in the incumbent "big care" providers favour is that no smaller players in their right mind will be building new rest homes. While a future moat for OCA, it's seriously real problem for future oldies who get sick without a lot of money.

Looking ahead some years to 2026 in my spreadsheets when the care stuff should be humming, I've got bad news. The 97% operations expense /care fees ratio hasn't budged. But I am basing my forward assumptions based on only 5 years of history with bulk decommissions and covid disruptions within it so things are likely to actually be better than calculated but who knows for sure.

I don't believe OCAs care suits (including the PAC and DMF) will ever really make any decent money … EVER.
I've always said they were a red herring as the source of where the OCA profit growth will come from and now I think it's actually worse than I was anticipating. Yes, they will make a little more profit in the future but it's more to do with their footprint growing rather than improved operations.

On a far lesser concern but more immediate effect for their “care” part of their profit is why the heck did they repay the subsidy ( I'm pretty sure ARV haven't...T-J?) . It has helped wipe out the growth this HY (the other reason being the 12.5% new share issued but that's for another day).
Financially I'm personally against the repayment as this is what the subsidy was for but a part of me is also proud that the directors choose to do an honorable thing. I did not know they did this until Monday so has caused me to downgrade my earlier stated share price expectations because of the reduced EPS effect. Although it will have no effect in a year or so.

While they have tried to show us 2 sets of books with stripped out repayment figures ( yet more adjustment on adjustments) it just has helped create a report that is extremely difficult to untease.

A year from now things will be simpler and clearer with all of these multi layers of adjustments having washed through.
I see it as the directors trying to be as informative as possible but for the folk with a day job, I doubt anyone ( apart from a few here on ST) can actually DYOR …..it's just too much.

If you are willing Just a Kiwi, I'd love to hear your opinion on what you think covid costs might be as we live with the virus. OCA spent $1m on it for 1 month of lockdown !!!...extra staff wages and PPE. Knowing the workings of care as you do, is this an expense that will be somewhat cemented in going forward or do you think covid costs will relegate away into the infectious stuff you always dealt with anyway and therefore at those older historic costs?

[oldtech]

Thank you for those insights and explanations Maverick, always appreciate your insights.

[BlackPeter]

Well that has to be one of the most complicated reports I think I've ever seen. Where do we even start?

To pick just one (of dozens) as not to send everyone to sleep, Beagles post about rampant care costs constantly stripping away any of the ultra slow gains of DMFs etc. You raise very valid concerns, and always have, about this ever growing disappointment.

To be fair, , the analyst pointing out that operation costs have gone up 9% , although true , needs a bit of unpacking . In those costs they had an extra one off cost of $1m for covid cost and they also repaid $1.8m of wage subsidy also they took over the staff cost at Frankton- a big paddock with a single level 44 bed rest home on it.
If We set aside these extra cost out and consider the extra new staff additions then the staff cost have actually risen this HY at the usual OCA annual pace of about 6.25% p/a over the last 5 years ( the govt DHB fees have gone up about 5.5% p/a in comparison over the same time) .

The ratio of operations expense /care fees tells a grim picture as you, again, rightly point out Beagle
These are annual ratio results;
2017-83%...2018-87%..2019-.90%...2020-97%...2021-97%...2022-(inc estimated 2hy) 97%.

So this year and the last 2 years operations expense /care fees have leapt up a lot and then flatlined at 97% which is pretty well only break even. This is either DHB underfunding as you suggest or extra covid costs (or some combo most likely). Given the time period and flatness of the 2 prior years (plus this year) I'm tilting towards covid being the biggest reason. I pity the poor mum and dad owned rest homes who will be really struggling without fandangled ORAs and PAC fees to help. One thing in the care big incumbents favour is no smaller players in their right mind will be building new rest homes. While a future moat for OCA, it's seriously real problem for future oldies who get sick without a lot of money.

Looking ahead some years to 2026 in my spreadsheets when the care stuff should be humming I've got bad news. The 97% operations expense /care fees ratio hasn't budged. But I am basing my forward assumptions based on only 5 years of history with bulk decommissions and covid disruptions within it so things are likely to actually be better than calculated but who knows for sure.

I don't believe OCAs care suits (including the PAC and DMF) will ever really make any decent money … EVER.
I've always said they were a red herring as the source of where the OCA profit growth will come from and now I think it's actually worse than I was anticipating. Yes, they will make a little more profit in the future but it's more to do with their footprint growing rather than improved operations.

On a far lesser concern but more immediate effect for their “care” part of their profit is why the heck did they repay the subsidy ( I'm pretty sure ARV haven't...T-J?) . It has helped wipe out the growth this HY (the other reason being the 12.5% new share issued but that's for another day).
Financially I'm personally against the repayment as this is what the subsidy was for but a part of me is also proud that the directors choose to do an honorable thing. I did not know they did this until Monday so has caused me to downgrade my earlier stated share price expectations because of the reduced EPS effect. Although it will have no effect in a year or so.

While they have tried to show us 2 sets of books with stripped out repayment figures ( yet more adjustment on adjustments) it just has helped create a report that is extremely difficult to untease.

A year from now things will be simpler and clearer with all of these multi layers of adjustments having washed through.
I see it as the directors trying to be as informative as possible but for the folk with a day job, I doubt anyone ( apart from a few here on ST) can actually DYOR …..it's just too much.

If you are willing Just a Kiwi, I'd love to hear your opinion on what you think covid costs might be as we live with the virus. OCA spent $1m on it for 1 month of lockdown !!!...extra staff wages and PPE. Knowing the workings of care as you do, is this an expense that will be somewhat cemented in going forward or do you think covid costs will relegate away into the infectious stuff you always dealt at those older historic costs?

Hi Mav,

Great analysis, as always, thanks for sharing.

Given your outstanding analysis of this company, just a couple of questions which corossed my mind (you may or may not want to answer ::

(1)
OCA's books always have been difficult to read and convoluted ... and with this report it just got one step worse.

This is something which can create cynical thoughts ... why would anybody want to present their figures in this form, unless they have something to hide.

Can you think about another reason?

Or is there a school for concealed book keeping which their CFO mastered - and if yes, would this be good for share holders like us?


(2)
I agree with your sentiments on repayment of the Covid wage subsidy. I guess given that this is funded by taxpayers and given to companies to (partially) cover some of the additional Covid expenses, I don't see how it is in the best interest of share holders if they repay this subsidy.

Do you?

[Rawz]

.....

A year from now things will be simpler and clearer with all of these multi layers of adjustments having washed through.
I see it as the directors trying to be as informative as possible but for the folk with a day job, I doubt anyone ( apart from a few here on ST) can actually DYOR …..it's just too much.

....

You can say that again. I am not even going to try whilst working full time and raising a young family.
This is why ST is so great. We are very lucky for you, Beagles, Winners etc contributions.

I base my investment in OCA based on macro trends and pricing to NTA. Then read everything that is posted here to help fill the gaps.

[Beagle]

Thanks for your thoughts Maverick. I know you have a lot of time to spend on OCA accounts. With no formal accounting or investment analysis training I think you do a splendid job in very difficult circumstances. As a professional I can report that OCA's accounts are by far the hardest to understand of any I have tried to comprehend.

Without restating anything I've previously said I agree with your perspective that care suites are by and large not going to be a material contributor to profitability going forward unless they are materially re-priced and I wouldn't rule that possibility out. By re-pricing I mean not just the capital value but also the DMF ratio's. Maybe we could see them repriced to a 15% per annum DMF fee non declining going forward ? I think OCA need to get super realistic and a lot more commercial here.

Its abundantly clear it costs an absolute fortune to provide high quality care and the cost is increasing at significantly more than the inflation rate. Not to put too fine a point on it but if "Johnny" has sold his $2m house to move into a $400K care suite and needs high quality care, he's still got $1.6m left over and does it really matter if he loses 15% per annum of the value of the care suite for every year he's there ?.... or is getting the very best care more important to him ?

I was also very disappointed to see them repaying the wage subsidy especially at a time when the Govt are outright refusing to fund the extra costs of care in relation to Covid. This makes no sense to me and looks like they have bowed to perceived socialist pressure.

I am hopeful that FY23 will see a good uplift in profitability with a more fulsome development book.
My expectations are that OCA management will take a more commercial approach towards unit and especially care suite pricing.

[Waltzing]

and the Beagle has Barked ...

its neck and neck between KPG and OCA...

[winner69]

BlackPeter says hope is not a good investing strategy but I'm hoping like hell that one day OCA will not be at the bottom of pile when it comes to how market rates it (Price / Book Value)

Here's the latest position. OMG the market views RAD more favourably.

I have also included how each Book Value has grown over the last four and half years --- maybe the market is rationale after all?


Hoping, hoping .... one day maybe the tabel will look different

[Snoopy]

Care and rising wage cost ….immigration policy?

My mate Michael

@MHReddell
Interesting result - in NZ we sometimes think of immigration keeping down the cost of rest-home care - but of course if true, this result presumably comes about mostly by pushing down the relative price of these types of labour.

In response. To this study:

[I] Immigrants keep us out of nursing homes
by Tyler Cowen November 30, 2021 at 2:31 pm in Economics Law

We examine whether immigration causally affects the likelihood that the U.S.-born elderly live in institutional settings.

I don't think it is realistic to compare the situation in the US (minimum wage $US10.30 per hour) and NZ as regards care home wages. In NZ those with L4 carer qualifications (a nurse in all but name) or for those with 12+ years service can earn $NZ27 per hour now (entry level wage is $NZ21.50 per hour). I think these are legislated minimums. So importing carer staff from overseas into NZ isn't going to get the job done 'super cheaply'. I imagine care homes in the USA are free to pay as little as they can get away with. So importing workers would push wages down 'over there'.

SNOOPY

[fastbike]

I don't think it is realistic to compare the situation in the US (minimum wage $US10.30 per hour) and NZ as regards care home wages. In NZ those with L4 carer qualifications (a nurse in all but name) or for those with 12+ years service can earn $NZ27 per hour now (entry level wage is $NZ21.50 per hour). I think these are legislated minimums. So importing carer staff from overseas into NZ isn't going to get the job done 'super cheaply'. I imagine care homes in the USA are free to pay as little as they can get away with. So importing workers would push wages down 'over there'.

SNOOPY

Yes too easy in this internet age to assume all USian views are valid.

[Panda-NZ-]

Residential housing is NZ's best performing asset class.

If OCA cannot capitalise on this then what good are they.